Cross Market Analysis: Using Options Market Data

Caitlin Duffy Equity Options Analyst, Interactive Brokers

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Disclosure of RisksOptions involve risk and are not suitable for all investors. For more information, read the “Characteristics and Risks of Standardized Options” before investing in options. For a copy call 203-618-5800 or click here. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities. Past performance is not indicative of future results. Investors should consult with a tax advisor as to how taxes may affect the outcome of options transactions/strategies. Supporting documentation for any claims and statistical information will be provided upon request.

Most option strategies involving futures and/or options spreads require a margin account. You can lose more funds than you deposit in the margin account;The firm can force the sale of securities or other assets in your accounts(s);The firm can sell your securities or other assets without contacting you;You are not entitled to choose which securities or other assets in your account(s) are liquidatedor sold to meet a margin call; The firm can increase its “house” maintenance margin requirements at any time and is not required to provide you advance written notice; and although IB generally will not issue margin calls and can immediately sell your securities or futures without notice to you in the event that your account has insufficient margin, if IB chooses to issue a margin call, you are not entitled to an extension of time to meet a margin call.

Transaction costs in multi-leg strategies could be significant as they involve multiple commissions charges. The examples in this presentation include fees and commissions charged by IB. The total US options commissions include IB fees, that are tiered based on volume, plus exchange fees.

Interactive Brokers LLC has direct market access. Customer orders are routed through IB’s automated systems and may be subject to varying system response time and account access due to factors such as trading volumes and market volatility.

Interactive Brokers LLC is a member of NYSE, FINRA, SIPC 2

Brief View of Derivative Market Data

Key StatisticsOption Implied Volatility

• A measure of uncertaintyOption Volume

• Investigate the patterns

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Option Implied Volatility: General Electric (GE)

Butterfly spread exampleJanuary 2009Option implied volatility is on the rise

January 2, 2009: 47% volatility• Shares @ $16.97

January 20, 2009: 91% volatility• Shares @ $13.21

January 20th butterfly put spread establishedBearish investor expects GE to plummet 43% to $7.50

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GE Option Implied Volatility

Jan. 2 IV @ 47% Jan. 20 IV @ 90.67%

Jan 20 – Butterfly put spread initiated in February contract 5

GE Option Implied Volatility

 Profile of the butterfly in February contract   Investor bought 14,000 puts at $5.0 strike   Bought 14,000 puts at $10.0 strike   Sold 28,000 puts at central $7.5 strike

•  Net cost = $0.19 cents or $266,000

•  Potential profits = $2.31 or $3,234,000

  What would/should you think if you saw this trade?   What would you do if you owned shares of GE at the time of this trade?

$5.0 $10.0 $7.5

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Basic Options Review

Calls vs. Puts

Other webinars you may want to view:Options I – Input VariablesOptions II – Greek Risk MeasurementsOptions III – Combining Options

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Summary of Calls & Puts

SELL

CALL PUT

BUY

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OFIR: Options & Futures Intelligence Report

Market ScannersValuable sources of information

• ConfigurableWhich scanners are most useful

Drawing inferencesWhat to look forHow to interpret trading patterns

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Market Scanners

Most Active by Options VolumeOpen Interest

Option Implied Volatility Put-Call Ratio / Call-Put RatioHot by Option VolumeMarket data displayed consists of the 50 securities in the requested category and may be limited by the filters and settings that you select.

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Most Active by Option Volume

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Time-in-scan

Citigroup (C) has been on the Most Active scanner for 5 hours and 44 minutes on this date with volume of 578,146 contracts

Pfizer (PFE) has been on the scanner for just 5 minutes with volume of 43,261 contracts12

Open InterestNumber of contracts traded during the session

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Open Interest: XLK Example

Compare 41,306 call options vs. previous existing open interest of just 128 contracts!14

Option Implied VolatilityTop Option Implied Volatility % Gainers

Top Option Implied Volatility % Losers

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Option Implied Volatility: Hansen Natural Corp. Example

- 21% decline in volatility on HANS

- Shares up more than 17% following second quarter earnings

- Uncertainty tends to decrease after earnings information has been released

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Put/Call Ratio vs. Call/Put Ratio

Can provide instantaneous hypothesis about whether trading is bullish or bearish

SLM Example

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Sallie Mae Example

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Sallie Mae Example

- Shares @ $8.76 on July 29, 2009- 37,000 put options purchased at the January 2011 2.5 strike price

- Fresh put buying action at deep out-of-the-money strike- What might be driving such activity?

More than 18 put options were traded to each call option exchanged by investors on SLM

during the trading session.

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Hot by Option Volume

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Case Studies

Call SpreadsStraddlesStranglesButterfly Spreads

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Call Spreads: Genworth Financial (GNW)

- Bull Call Spread

- Partially financed by sale ofputs

- Maximum profits attained ifshares rally to $13.00 byOctober 16 (expiration day)

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Straddles: Eastman Kodak (EK)

-Volatility play

-Approximately15,000 calls andputs sold short atthe Jan. 2011 10.0strike

-Gross premiumreceived = 5.63

- Notice optionvolume of 220,741has exceeded openinterest of 208,096during tradingsession 23

Strangles: Macy’s (M)

Short strangleGives indication of investor’s predictions

Expects lower volatility post earnings

Selling 3,500 puts @ Nov. 14 strike @ 1.35 eachSelling 3,500 calls @ Nov. 19 strike @ 75 cents eachBetting price of Macy’s will remain within this range by expiration day in NovemberMaximum potential profits = amount of gross premium received on sale –costs = 2.10 per contract14 19

Current price = $15.40

b/e = $11.90 b/e = $21.10

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Butterfly Spreads: Continental Airlines (CAL)

- Equidistant strike prices, 1x2x1 ratio tell-tale signs of abutterfly spread at work

- Shares of CAL @ $9.14 on June 12, 2009

- Investor betting shares will rise to $12.50 by September

Parameters of the butterfly spread:- Paid net 47 cents per contract for the transaction

- Bought 5,000 calls @ 1.40 @ Sept 10 strike- Bought 5,000 calls @ 0.37 @ Sept 12.5 strike- Sold 10,000 calls @ 0.65 @ Sept 15 strike

- Net cost = (1*1.40 + 1*0.37 – 2*0.65 = 0.47)- Maximum potential profits = 2.50 – 0.47 = 2.03 per contract

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Butterfly Spreads: Continental Airlines (CAL)

•  Bullish trade, but in hindsight not bullish enough!

• CAL traded as high as $16.98 ahead of expiration day (Sept. 18, 2009)

•  You can see from the one month chart of CAL that shares blew right past the point of maximum profits at the $12.50 level

• Trader could have unraveled the trade at some point ahead of expiration to take profits

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Conclusion

Numerous opportunities to employ cross market analysis between stocks and equity options

Too many for just one webinar session!

Searching for patterns and clues is the best way to get started

The OFIR is a helpful guide to follow

Practice, practice, practice!

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Questions?

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